Rights and Obligations In Patent Licenses

A patent license, like most contracts or agreements, has a number of provisions that are considered familiar or standard provisions. This fact can cause the reviewer to overlook what can become a thorny detail. Clients, and at times counsel, will tend to focus on bottom line provisions related to the royalty base, royalty rates, definitions of net and gross sales value, royalty payment schedules, and tax and penalty payments. This focus can result in the reviewer overlooking at least two other "sleeper" provisions that can have an adverse impact on the licensee's ability to challenge the validity of a licensed patent. The first provision is commonly known as a no-challenge clause or provision. The no-challenge term defines how the licensee can challenge the validity of the patent and potential results triggered by a challenge to the patent. The second provision is a forum selection clause or provision. The forum selection term, in addition to stating the jurisdiction where disputes must be resolved, can include things like a sequence of mediation or arbitration (binding or non-binding) that must happen before there is court litigation or a USPTO challenge.

No-challenge clauses became popular about 50 years ago on the heels of a Supreme Court decision. For many years prior to the U.S. Supreme Court's decision in Lear v. Adkins, 395 U.S. 653 (1969), it was the prevailing view that patent licensees were prohibited from challenging the validity of the licensed patent. This prohibition was commonly known as the doctrine of licensee-estoppel. In Lear v. Adkins, the Supreme Court examined this doctrine in view of two strong and opposing interests. The first interest was based on parties being bound to perform according to the contract terms. A court's ability to enforce an agreement is bedrock to the legal system's foundation. If the parties agreed to a patent license that included a no-challenge clause, the courts should enforce that agreed upon provision. The second interest was grounded in a broader public interest that invalid or bad patents should be declared invalid and eliminated from the marketplace. In other words, the patent system is strengthened and the general public is better off when the patent pool is culled of poor and invalid patents. The Supreme Court weighed these interests and found the second interest more compelling. This resulted in the court overturning the doctrine of licensee-estoppel in Lear v. Adkins and freeing licensees to challenge the validity of a licensed patent.

Forum selection clauses, which generally are important in any contract, are especially critical in patent licenses due to their association with the no-challenge provisions and their impact on the location of a challenge to patent validity. The traditional routes for challenging patent validity were the district courts and the USPTO reexamination procedures. Patentees generally used forum selection to keep any district court challenge in the patentee's preferred location and require the licensee to repudiate the license before challenging the patent in any forum.  This repudiation requirement was known as license estoppel. Thus, the licensee was required to surrender the license protection and was contractually obligated to begin any post repudiation challenge to the patent in a designated forum. This requirement flowed from the reasoning that the licensee's district court means to challenge a patent would be a declaratory judgment action for a finding of non-infringement or patent invalidity. Since the licensee was insulated from an infringement action by the license agreement, the licensee could not bring a declaratory judgment action challenging the patent's invalidity because there was no case or controversy. In MedImmune v. Genentech, 549 U.S. 118 (2007), the Supreme Court addressed this issue and held that a patent licensee was not required to terminate or breach the license agreement as a prerequisite to bring a declaratory judgement action seeking to invalidate the patent.

Following the passage of the America Invents Act (AIA), the procedures for USPTO patent challenges changed with the creation of the inter partes review (IPR). The IPR is now one of the most popular ways to challenge a patent. As IPRs become increasingly popular, more patent licensors are crafting forum selection clauses requiring disputes to be litigated in courts and not via an IPR. A recent nonprecedential Federal Circuit decision, Dodocase VR v. MerchSource, 2018-1724 (Fed. Cir. Apr. 18, 2019), addressed a forum selection clause requiring disputes under the agreement to be litigated in California courts. Despite this requirement, the licensee filed USPTO petitions, including an IPR, challenging the subject patents. The Federal Circuit affirmed the district court's decision ordering the licensee to withdraw its USPTO petitions. The licensee, relying heavily on Lear v. Adkins, has petitioned for a rehearing. While this issue is still unsettled, it highlights the importance of exercising due diligence in crafting forum selection provisions.

Licensors should address the patent challenge issue by including post-challenge provisions, such as increased royalty rates, attorney fee reimbursement for an unsuccessful challenge and acceleration of any upfront payments that are triggered immediately upon any patent challenge in the courts or the USPTO. Additionally, licensors should consider using the forum selection clause to limit the challenge venue, such as was done in Dodocase VR v. MerchSource.

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Tom Gushue is an intellectual property attorney with Volpe and Koenig, an IP boutique law firm with offices in Philadelphia and Ewing, NJ. His practice focuses on patent matters. Visit vklaw.com for more information about Gushue and the firm.